Fed Won't Join Supreme Court Appeal on Loan Disclosures

The Federal Reserve won’t join a
group of the largest commercial banks in asking the U.S. Supreme
Court to let the government withhold details of emergency loans
made to financial firms in 2008.

The central bank’s decision not to appeal makes it less
likely the high court will hear the case, said Tom Goldstein, a
Washington lawyer who has argued 22 cases before the high court
since 1999 and whose Scotusblog Website tracks the panel.

The Clearing House Association LLC, a group of the biggest
commercial banks, filed the appeal today. Under federal rules
for appeals, a lower court’s order requiring disclosure remains
on hold until the Supreme Court acts.

“We will await a determination from the courts and will
comply fully with any final order,” said David Skidmore, a
spokesman for the central bank. “The Federal Reserve remains
committed to timely and responsible transparency of its
operations.”

The bank group is appealing a federal judge’s August 2009
ruling requiring the Fed to disclose records of its emergency
lending. Bloomberg LP, the parent company of Bloomberg News,
sued for the release of the documents under the Freedom of
Information Act.

The central bank has never disclosed the identities of
borrowers since the creation in 1914 of its Discount Window
lending program, which provides short-term funding to financial
institutions, the Clearing House said in its petition.

‘Threatens to Harm’

“Disclosure of this information threatens to harm the
borrowing banks by allowing the public to observe their
borrowing patterns during the recent financial crisis and draw
inferences -- whether justified or not -- about their current
financial conditions,” the group said in its appeal.

The Fed’s emergency programs, which were “essential
responses to the recent financial crisis,” would be harmed if
the central bank is forced to disclose lending records, the
group said in a statement today. “Unless the ruling is
overturned by the U.S. Supreme Court, businesses and individuals
may decline to participate in these programs, possibly impairing
the federal government’s ability to act effectively in times of
crisis.”

‘More Accountability’

“Greater transparency results in more accountability, and
the banks’ resistance continues to engender suspicion among
taxpayers about the bailouts,” said Matthew Winkler, Bloomberg
News editor-in-chief. “The banks’ move to appeal will deepen
the public’s skepticism and defend a position that every other
court has disagreed with. The public has the right to know.”

Under the Supreme Court’s normal procedures, the justices
may say as early as mid-December whether they will take up the
case. If so, they would hear arguments next year and likely rule
by July.

The central bank’s decision not to file its own appeal
undermines a central argument against disclosure, said Simon Johnson, a finance professor at the Massachusetts Institute of
Technology and a former chief economist at the International
Monetary Fund.

“The banks are on their own -- their appeal without the
Fed makes it clear that system stability issues are not at
stake,” Johnson, a Bloomberg contributor, said in an e-mail.

The Fed and the U.S. solicitor general, who serves as the
government’s top Supreme Court lawyer, will probably file a
brief in response to the Clearing House petition, said
Goldstein, of Scotusblog. He’s a lawyer at Akin Gump Strauss
Hauer & Feld LLP.

Possible Argument

One possibility is that the government will argue that the
case isn’t worthy of Supreme Court review, even though it will
say lower courts reached the wrong conclusion, Goldstein said.

The fact that the banks appealed while the Fed did not
“demonstrates the desperation of the banks to hide their true
condition during the crisis,” said Joshua Rosner, managing
director of Graham Fisher & Co., an investment advisory firm in
New York.

“Political realities made it harder for the Fed to do the
banks’ dirty work,” he said.

The Fed is facing unprecedented oversight by Congress. The
Wall Street Reform and Consumer Protection Act, known as Dodd-
Frank, mandates a one-time audit of the Fed as well as the
release of details on borrowers from Fed emergency programs.
Discount Window loans made after July 21, 2010, would have to be
released following a two-year lag. The Bloomberg lawsuit asks
for information on that facility and others.

‘Term Reports’

At issue in the litigation are 231 “remaining term
reports,” originally requested by the late Bloomberg News
reporter Mark Pittman, documenting loans to financial firms in
April and May 2008, including the borrowers’ names and the
amounts borrowed. Pittman asked for details of four lending
programs, the Discount Window, the Primary Dealer Credit
Facility, the Term Securities Lending Facility and the Term
Auction Facility.

After averaging $257 million a week in the five years
before March 2008, Discount Window borrowing jumped to a peak of
$111 billion on Oct. 29, 2008. It was $20 million last week. The
other three programs accounted for more than $800 billion in
lending at their peak, according to Fed data.

“The Discount Window is problematic because the Fed since
the 1930s has used it to provide assistance to banks on the
verge of failure,” said Joseph R. Mason, a finance professor at
the Ourso College of Business at Louisiana State University in
Baton Rouge. “Making loans means you add liabilities to the
bank, so lending a bank money makes it more insolvent. This is a
chance to show that the Fed did not lend to weak banks.”

In trying to avoid disclosing the documents, the Fed
invoked one of nine exemptions to the Freedom of Information
Act, or FOIA, which mandates the rules for public disclosures by
the federal government. Exemption 4 makes allowance for “trade
secrets and commercial or financial information obtained from a
person and privileged or confidential,” according to the law.

The stigma “can quickly place an institution in a weakened
condition vis-à-vis its competitors by causing a loss of public
confidence in the institution, a sudden outflow of deposits (‘a
run’), a loss of confidence by market analysts, a drop in the
institution’s share price, and a withdrawal of market sources of
liquidity,” Madigan said in a declaration that was part of the
Fed’s defense.

Lower Court’s Ruling

Manhattan Chief District Judge Loretta A. Preska wrote in
her Aug. 24, 2009, ruling that the risk of looking weak to
shareholders and competitors was not reason enough to keep the
information from the public. On March 19, an appeals court
upheld Preska’s decision and on Aug. 20 the appeals panel denied
the Fed’s request to reconsider.

The central bank’s decision to stop appealing was
unexpected, said David A. Schulz, a partner with the New York
law firm Levine Sullivan Koch & Schulz LLP who filed a friend-
of-the-court letter supporting Bloomberg’s position.

“I’m surprised that the Fed, after arguing strenuously
that disclosures would jeopardize its ability to protect and
regulate banks, would decide to back down,” he said.

On his first day on the job, President Barack Obama vowed
to open government information to its citizens.

“The government should not keep information confidential
merely because public officials might be embarrassed by
disclosure, because errors and failures might be revealed, or
because of speculative or abstract fears,” Obama said in a Jan.
21, 2009, memo.